Essex Property Trust Inc (ESS) 2002 Q4 法說會逐字稿

Good day and welcome to the Essex Property Trust Incorporated 4th quarter earnings results conference call. Today's call is being recorded. With us on the call today are Keith Guericke, President and CEO, Mr. Bob Talbott, Senior Vice President of Operations and Michael Schall, Senior Vice President and CFO. For opening remarks, I would like to turn the call over to Mr. Guericke. Please go ahead, sir.

Thank you. Welcome to our 4th quarter call. As usual, we will be making some comments in the call which are not historical facts, such as our expectations regarding markets, financial results and real estate projects. These statements are forward looking statements which involve risks and uncertainties which could cause actual results to differ materially. Many of these risks are detailed in the company's filings with the SEC, and we encourage you to review them.

This morning I want to give you just a brief summary of significant accomplishments during 2002. In addition to that, I want to update you, as I typically do, on the markets, with respect to job growth and supply, and what we expect the resulting rent trends to be for 2003. In addition to that, Bob Talbott will give you more specific information on the operations market later in the call. Finally, I want to update you on acquisitions and development.

First, the 2002 accomplishments, we have completed the funding of the Essex value funding ended February of this last year, which gives the company $750 million of acquisition capability. We completed the Sachs merger, which increased our portfolio concentration to 58%, in Southern California. More importantly, we increased our concentration in San Diego by 2,700 units, which has been and we hope will continue to be one of the best multifamily rental markets in the country. We completed the construction of our first high rise and it is leased up. Management is working on an entrepreneurial action to create other income so we can supplement other projects. Essex was one of the few multifamily companies that ended the year with positive FFO growth.

With respect to sales and repositioning, during the year we sold approximately $100 million of property, taking profits, in addition, we repositioned one property and $10 million of profit through a 1031 exchange.

Now, to address our major markets, starting with the Northwest, which represents 23% of the portfolio. In Seattle, the new multi family single family supply for 2003 is projected as follows. A new multi family is 3,500 units, which represents approximately 1% of the existing stock and new single family supply is 7,900 units, which is 1.2% of stock. We are expecting to see moderate job growth of 7/10 of 1%. We expect to see market rents in our submarkets staying flat for the year, and market occupancy at about 93 1/2%.

In Portland, new supplies are expected to be 1,300 units of multi family, or 6/10 of 1% of existing stock, and 10,000 in new single family units, or 1.9% of existing stock with moderate growth approximately 1%. Market rent growth is forecast to be flat for the year with occupancy at about 93 1/2%.

In the Bay Area, where we have 17% of our portfolio new supply is at very manageable levels. Starting with San Jose, the new multi family supply is projected to be 2,700 units or 1.3% of existing stock and single family supply of only 4/10 of 1% or 1,700 units. In Oakland, multi family is projected to be 1,400 units, or a 1/2% of existing stock with 6,000 single family units which is about 1% of existing stock. Finally, San Francisco at 1,700 units of multi family which is about a half percent of stock, and 1,000 new single family units, which is 3/10 of 1% of stock.

Job growth will be marginally positive at about 23,000 jobs, which is less than 1% for the entire Bay Area, but it is positive, for 2003, we expect rental rates to be flat, down slightly depending on the market. And we're also expecting the occupancies to remain at the 94 to 95% level.

Southern California has 58% of our portfolio, and we expect to produce the best operating results from that region during 2003. Again, new supply is relatively manageable in all of these markets, but let me go specifics. Ventura multi family is 350 units or 7/10 of 1% of the existing stock and single family supply is 2,400 units, or just over 1% of stock. L.A. County, new multifamily is 7,600 units and are representing about a half percent of stock and single family supply is 7,900 units, just under a half percent of stock.

Orange County, 3,000 units, just under 1% of stock and single family, 6,000 units, at 1% of stock. San Diego, 4,500 units of new multi family which represents 1.2% of existing stock and single family supply of 8,400 units at 1.3% of existing stock.

The employment picture in Southern California is much more positive than other markets. 2003 job growth is expected to be 1%, with unemployment rates at or better than the national average. We're expecting occupancy to remain at 95% for 2003, with rental growth at 2 to 4%, depending on the sub market. Other factors we expect to help the performance of our rental market despite the bleak job outlook is the relative cost of home ownership versus renting.

In the Pacific Northwest, median home prices that have appreciated 5%. Of course, the numbers for Northern California and Southern California were 7 1/2% and 20%. The overall price growth equates on an average basis of 14% across the portfolio. Even with the lower mortgage rates, especially in the California markets, with increased prices, home ownership is more expensive. And going forward with an economic recovery, we expect to see mortgage rates increasing, therefore, home ownership should be increasingly more expensive versus renting, especially with rental rate drops that we've seen in the Northwest and Northern California over the last 18 months. As we have always stressed on these calls, it's the supply/demand fundamentals of both single and multi family that drives the success of both single family and multi family companies.

Now, let me update acquisitions and developments by markets starting with acquisitions. In the Northwest, rent has decreased as we talked over the last year. However, prices don't seem to reflect that reality. There's very little velocity in the market. Most sellers have good debt in place, and are not forced to sell. Cap rates and yields that we have looked at recently are in the low to mid-6 range. What's more stressing or important to that is that there's flat rental growth, so we just don't see the ability to make deals in that environment going forward.

In the Bay Area, cap rates are even worse from the buyer's perspective they are in the 5 1/2 to 6% range on economic ramp. Again, this market, at least to this point, has seen a declining ramp. Sellers remember when their properties were worth $170 to $180,000 a unit and they are just not willing to sell at realistic cap rates. For the most part, they have good financing in place, occupancies are in the mid 90s, and sellers don't have to do anything, so very little happening in Northern California.

Cap rates in Southern California -- I give it a little wider range in the 6 to 7 range. However, what makes deals possible down there is rents have not crashed like they've done in Northern California and in the Pacific Northwest, in fact, we see rental growth going-forward. So having said all that. It's been a magnet for every real estate buyer in the world, being down there. And it's difficult to purchase deals in the 6 1/2 to 7% range with rental growth. Having said all that, our goal for the year is to purchase $250-300 million of assets that will have rental growth going forward in the 3% to 4% range.

Finding new development deals is equally difficult, starting with the Pacific Northwest. Basically, we don't see any need for new supplies there and are not looking in that market at all. The Bay Area continues to be difficult although we've commented in past we've seen land prices going down, on a one-on-one basis, it's not enough to see developments going down. Land prices range from 35,000 a unit to 80,000, depending on the density of the area. Currently we have several areas tied up in the East Bay and we hope one or two of them come to fruition

Just to give you a sense of what the market's like in Southern California, there's a number of property it is down there in the 50,000 to $60,000 range and in Santa Monica, there's several projects being marketed on the market in the $80,000 range. Our goal for 2003 is to acquire enough land to start 100 to $150 million in development deals.

Now, I'd like to turn the call over to Bob Talbott, who will give you more color on the operations behind the market.

Good morning. This morning I'll comment on current conditions in each of our major markets. I'd like to remind everyone that our operating strategy and objectives are established by the market and the weakened economy. We will meet the market demand in order to maintain our occupancy. We estimate market occupancy at 93 1/2%.

This information comes from 3rd party data provided by our in-house economist. Keep in mind these are broad MSA level figures, and consequently we should expect to see some said markets perform better than these averages. As of February 1 of this year, our of occupancy in Seattle is 94 1/2% and our net availability expressed as a ratio of our total portfolio, that is at 6.4%. Our traffic in the market right now is flat compared to a year ago.

Turning to Portland, Portland's west side continues to feel the effects of the weaker economy, and consequently, it also continues to be a concessionary market with one month free still being common. We estimate market occupancy to be at 93% as of February 1, our occupancy is 94%, with our net availability at 7%. Traffic is presently about 30% off of where it was a year ago.

Turning to the Bay Area, we still see some weaknesses at the very high end of the market, particularly in San Jose, our estimate for market occupancy in the San Francisco Oakland area is between 93% and 95% and 93% in San Jose. As of February 1, the occupancy in our portfolio throughout the Bay Area is 96%, with a net availability of 6 1/2%. We still see some concessions, smaller than a year ago, it's typically in the range of two weeks to a month. Traffic is actually up about 8% over a year ago.

In the L.A. Ventura markets, that market's relatively stable, and we see our prospects for rent growth there expect to be at the top end of the range that Keith previously gave you. We see very minimal concession activity, if they're used at all, it's somewhere between $150 and $500. Market occupancy at is -- is at 95% and as of February 1, our occupancy rate is at 95%. Traffic right now is actually up about 12% from a year ago.

Looking at Orange County, this market's also relatively stable with prospects for rent growth, particularly in the North Orange County area, to be at the top end of our range, and with South County area coming in closer to 1 to 2%. Concession activity is limited to the beach market in South County. We look at the beach situation that is more seasonal than anything else. If concessions are used, we're seeing anywhere from $300 to a month rate. Market occupancy we estimate to be at 95%, as of February 1st, our occupancy rate is at 96% with a net availability of 5.7%. Traffic right now is down about 6% from a year ago.

Looking at San Diego, we've seen some pockets of softness due to military deployments, depending on how the world events play out, we could expect to see additional deployment. Our San Diego portfolio is diversely located, and our total exposure in San Diego is about 12% due to military. We currently have three buildings located in the Camp Pendleton Mason Naval Center area which has been affected by military deployment. As of February 1st, occupancy was 89% with an availability of 14 1/2%. The balance of the portfolio is currently 95% occupied with a net availability of 6.6%. We estimate total market occupancy at 95%.

Bear in mind that this is a -- we believe this could be a lagging market indicator as a 3rd party data typically is and won't be reflective of the current actions with the military. One interesting fact also to note, that in -- because we think about the military and our exposure there. In 1989, the Department of Defense represented about 2 1/2 percent of the jobs in that region and today that number is down to 1.6%. We see no concession activity in the market other than the military affected areas where we're seeing up to a month free. I don't have any traffic figures for you in San Diego, as the assets we have there now we didn't own and manage a year ago.

Turning to some of our other activities, as mentioned in the release, we completed the releases on Lake Marin last month. The property is currently 95% leased. San Marcos in Richmond is also leasing up well. We leased 39 units in January, and as of January 31st, occupancy of the property was 39% and of the units delivered by construction, we were 84% occupied.

We can expect 2003 to be a challenging year. Consequently, we continue our defensive strategy in most markets, with our focus on basic property management fundamentals, this includes focus on maintaining our occupancy and our continued efforts into lease expectations and avoiding the traditionally stronger 1st and 4th quarters. With that, let me turn the call over to Mike Schall.

Thanks, Bob. I'd like to thank everyone for joining us this morning or afternoon, depending upon where you are.

Please note that we have sent out a press release and a supplemental reporting package which is available on our website or you may call our investment services office at our corporate offices here in Palo Alto. I will cover quarterly financial results, second, loss to lease. Third, balance sheet and an update on development projects. and fourth, estimates of FFO for 2003.

First topic is to discuss the quarterly results in a bit more detail. As you know, FFO for the quarter declined 2 1/2% to $1.09 from $1.12, in the 4th quarter in 2001. For the year, FFO per share increased 2 1/2% to $4.50 from $4.49 in the prior year. The increase in FFO was achieved despite a 5.3% decline in same property revenue and an 8.3% decline in same property NOI. Results were largely offset by miscellaneous nonrecurring revenue for the year and lower interest costs.

For the quarter, the bright spot continues to be the Southern California markets, where we generated 7 1/2% revenue growth and a 8.4% NOI growth. The rate of decline in Northern California revenue has abated slightly. For the quarter, it was 11.4% decline, as compared to a 13.4% decline in the 3rd quarter of 2002, and a 14.9% decline in the 2nd quarter of 2002. Much of the reduction or abatement, however, is attributable to easier prior year of comparisons as opposed to significant improvement in the current quarter.

The Northwest revenue trends essentially follow a pattern that is similar to Northern California, the numbers I just mentioned. Although the percentages involves are not as large as those reductions in Northern California. I have specific items to discuss, starting with internal growth. With the exception of Southern California, as I stated before, internal growth continued to be a challenge. Same property results hit the worst point in the second quarter of 2002. Where same store rents declined 6.8% again, in Q3 this had been reduced to 5.5%, and in Q4 the decline was 3.3%.

A couple of components of the e.3%, same property revenue decline, the first component is occupancy, which on the same store portfolio increased as compared to the 4th quarter of the prior year from 93.2% previously to 95.5%. The increased occupancy in Q4 2002 as compared to Q1 added approximately 1,065,000 to the same store revenue. Occupancy alone represented a 2.6% positive offset to the same store revenue decline. The press release indicated a slight reduction in occupancy occurred between Q4 versus Q3 2002. We hit a high occupancy level -- the highest occupancy level of the year at the end of Q3 2002 at 96.1%.

Second component of the decline in same store revenue is scheduled rent, which accounted for 5.9% of the overall 3.3% same store revenue decline. As reflected in the loss of lease numbers that I'll comment on later, market rents by the end of the 4th quarter had dropped another 1% relative to September 30th, 2002, which was led by a 1.9% reduction in Northern California and a 3.8% reduction in the Pacific Northwest, as offset by rents increasing .4% in Southern California.

Same numbers for the year versus the quarter. Economic rents for the year were down 5%, comprised of Northern California down 9.8%. Southern California remaining essentially flat and the Pacific Northwest being down 12%.

Third component of the drop in same store revenues is concession activity. The amount of concessions recognized during the quarter decreased as compared to both the 4th quarter of 2001, and the 3rd quarter of 2002. As you know, we expense free rent in the initial period of the lease rather than reporting on a net effective basis so all that flows through the current quarter. We recognized approximately 600,000 in same store concessions in Q4 2002, which is down from 685,000 approximately in Q3, up 2002 and up 614,000 as of the 4th quarter of the prior year.

The final comment on concessions, as reflected in the turnover percentages, which are part of the supplemental. We turn approximately 22% fewer units in the 4th quarter as compared to the 3rd quarter of 2002. At the same time, concessions on the same store portfolio decreased approximately 12 1/2%, in other words, less than the number of units returned, which means that there actually was a slight up tick in concessions per turn, which is understandable given that the 4th quarter is typically our weakest leasing season.

Turnover percentage, again from the supplement from the quarter was annualized at 52% down from 55% in the prior year and down from 67% in the 3rd quarter of 2002. As Bob mentioned, we have tried to be very aggressive in timing our leases to expire during the historically stronger summer months, which explains the fluctuation in turnover percentage.

Next, I'd like to address operating expenses, which increased 9.1% for the quarter and overall, 2.9% for the year. Essentially, the 4th quarter increase represents a timing and processing of expenditures, and does not represent a trend. As previously stated, we think that 2003, same property operating expense will range somewhere in the neighborhood of 3%.

I wanted to make a couple comments with respect to Southern California, which is, of course, our largest concentration of properties. During the quarter, the 4th quarter, occupancies in Southern Cal were 96.3%, effectively unchanged from the 3rd quarter and up significantly from a year ago. Breakdown of the 7 1/2% increase in same property revenue is scheduled rents, increased -- the portion of the increased trade schedule is 1.9%. Increase in occupancy was 3.8% decrease in concessions was .4% and then other property income represents the balance.

Common fee and other income, it has become significantly larger over the years as we have increased our co-investment program. Interest in other income included joint venture depreciation decreased 3.4 million to 6.2 million versus the 9.7 million that was reported for the 1st quarter of 2001. The decrease was mainly due to the reduction of the company's assets that were being warehoused on behalf of the Essex value fund which were contributed to the fund by the end of 2001.

The nonrecurring portion of the fee income was $1.4 million as indicated in the supplement. That had two major components. First on October 1st, 2002, the company received payment in full of its $40 million nonrecourse mortgage on the Monaloa Apartments in Hawaii, and realized the balance of prepaid interest which was $1.1 million net accrued expenses. The company now has no further obligations or income related to the Hawaii assets. Second component was that the company earned an assignment fee of 325,000 related to a commercial project that is adjacent to one of its development deals.

Interest in amortization expense decreased by 884,000 to 9.1 million in the quarter. That was attributable to three factors, essentially weighted average debt, remained effectively unchanged from the prior year. The average interest rate on long-term debt was down approximately 10 basis points, and a decrease in our line of credit rate from approximately 4% in the prior year to approximately 2 1/2% currently, generated approximately 375,000 in favorable contribution during the quarter. In addition, the interest rate on the tax exempt variable rate bonds also decreased.

General administrative expense is broken out in the supplement, it decreased by 388,000, effectively relates to bonus accruals being reduced in the prior year, offset by allocations of G&A to the management company.

Second topic we wanted to talk about is loss to lease. Again, loss to lease is detailed in the supplemental package. Briefly, we defined loss to lease as a difference between market rents for our price sheets at the properties and scheduled or in-place rents. Loss to lease for the portfolio December 31st was 8.1 million or 4% of scheduled rent reflected in a small increase from 7.8 million or 3.7% of scheduled rent last quarter. As with previous quarters, negative loss to lease in Northern Cal and the Pacific Northwest is now minimal. Southern California loss to lease was 9.2 million or 7% of scheduled rent as of December 31st '02. Again, with respect to loss to lease, it's important to note that we expense rent -- free rent up front rather than amortizing it into effective rent.

The third topic, as Bob indicated the Essex at Lake Marin development project is now 95% leased. That will come off our development schedule going-forward. The project lease quickly we expected stabilization in May 2003, so we beat that by 7 months.

Second on the San Marcos development in Richmond, we have increased our estimated costs from 46.1 million to 50.9 million due to delays, increased development department allocated overhead, and change orders. The project continues to lease well. It was 27% leased in September 30th, 42% at December 31st, leasing activity has kept up right behind the delivery of completed units.

Finally, on the Hidden Valley Parker Ranch development in Simi Valley, we have increased our total costs from 43.2 million to 46 million. Most of this was due to tax exempt bonds which have a significantly greater up front cost and have a lower interest cost as compared to traditional financing we originated 33.9 million in tax exempt financing . Cap Ex, actually, a couple comments, Cap Ex for the year was $355 per weighted unit. We expect that to grow at the inflation rate in the foreseeable future. We now break out in the cash flow statement as part of our SEC reports, the addition to real estate line items, and you can get a detail of that breakout in the SEC reports.

Interest coverage remains strong, 3.8 times EBITDA debt to market cap was 36.4% as of December 31, 2002. We continue to have significant investible dollars from the Essex apartment value fund from approximately 350 to 400 million. I guess the point I'm trying to make is, we -- without taxing our balance sheet, we can continue to invest throughout our market. So that should be good news.

And the 4th topic is FFO expectations. We are going to keep our FFO expectations in the same range as discussed before for 2003. And are not changing the detail behind them, we currently estimate it will be from $4.33 to $4.45 per share. And that is with the assumption that same store NOI will be in a range of flat at the high end, the $4.45 number and minus 2% at the $4.33 number.

That concludes my comments. Again, I would like to thank everyone for joining us. Steve, we would like to take questions now, thank you.

Thank you. The question-and-answer session will be conducted electronically today. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touch-tone phone. If you are using a speaker phone, please remove the mute function to allow your signal to reach our equipment. We will proceed in the order you signal us, and take as many questions as time permits. Once again, to ask a question, that is star one. We'll take our first question from Kevin O'Shea with UBS Warburg.

Good morning still, in California. Question regarding the Lake Marin development, can you give us where the stabilized yield is coming in relative to your budget yield?

Yeah, I'd be glad to, Kevin. The yield upon stabilization is around 7%. We expected that to be -- doing this from memory in the high 8s to low 9 range, and so I guess looking back at what happened, you know, we -- because we take a relatively defensive position with respect to lease ups in general and vacant units, we wanted to move the leasing activity up, and I think that we probably were aggressive in terms of pricing the unit as a result of that, and, you know, exceeded our pace and gave a little bit on rents.

Plus, we had assumed when we tied the deal up, several years ago that we would have a continuation of rent growth which did not occur, so I think both those things account for the difference between our expected yield and where we actually are at.

Okay. And in the past, I think you had talked about potentially converting the property to a condo use or from time to time we're going -- were going to think about that. Do you have any further thoughts about that, or do you think you'll continue to own a few simple?

We have a condo -- we've put up a condo map on it, that possibility is available. As everyone knows, the single family market has been on fire here in the West Coast. It's something clearly that we continue to evaluate, whether we did it ourselves or we probably, you know, get a condo developer involved and sell it to them at some discounted condo price. I mean, I think there's a fair amount of risk selling a high-rise condo out. If we did it it would probably a market sale transaction. Nothing on the horizon, so don't put anything in your numbers.

Yeah. I actually just wanted to touch one thing Keith said. I think you meant to say a premium to for a condo converter. So it would be a premium to existing capped out value of the property, because as everyone knows, you know, for sale real estate has done considerably better than for rent, especially in that marketplace.

Have you permanently financed the property yet?

We have not. It does not -- it is unincumbered.

So construction costs are still in your line, which, looking over the last couple quarters is about 18% of your total debt obligations, just trying to get a sense, where do you see that number trending over the coming year?

You know, I think that we are pretty comfortable with that level of line debt, and we think we have enough, you know, the reality is, most of our investment activity is going to be funded with the fund, so I don't see a big change in that line item.

Okay. I think Keith you touched on this a little bit when you were talking about investment activity for the coming year, but as you look at your -- at allocating capital, what kind of yield advantage are you looking at for potentially some of the development activities that you have, particularly your JV development activities in Southern California and then how do you evaluate that relative to potentially undertaking some acquisitions?

Well, historically, I think, us as well as many people need a premium of 100 to 150 basis points of development just given the risks. Given that we're looking at buying deals in southern California at 6 3/4. That would say we wanted to be at 8 1/4, 8 1/2 development yields.

That's what we're trying to shoot at, as Michael said, the Essex ended up at slightly less than that. The property enrichment is going to be in the -- you know, mid to high 8s, even with the cost increase that we talked about today, just given the general -- the overall cost of that property in the marketplace. Going-forward, I mean, we're trying to target the hundred basis point to 150 basis point premium over acquisitions. And it's a very difficult thing to find, that's why we essentially put no new development deals in play in 2002, everything we've worked on were things we had in the pipeline prior to that time.

As I said, we have several deals tied up in the East Bay and several deals tied up in Southern California that have relatively low land costs relative to the marketplace, and we're hoping that they will prove out to meet those parameters.

I guess given the -- I'm just trying to get a sense, as you look at Southern California, and in light of the tremendous investor interest and moderately priced apartments in those markets, and the acquisition yield you're looking at, do you think you could see a little more development activity from you going-forward down there, or do you think your basic investment strategy will remain in place?

I think it's going to remain in place. It's historically been about, you know, 20 to 25% development in the -- and 75% acquisition. Just given the, you know, just given the risks of development, we probably don't want to expose ourselves any greater than that.

Okay. Final question, just touching again on the facts acquisition and the troop deployment issue, of the three communities that seem to have been affected by that, how many units does that affect of the roughly 2,800 units you acquired.

About 800, approximately 800, as one at Camp Pendleton and two down near Mirra Mesa. So that would be --

Well, I guess then in light of that, when you announce the transaction, your expectations were for an initial NOI yield of 7 1/2% I believe on the portfolio. Do you think that given the challenges posed by the troop deployment will come in a little bit? Or do you think net/net you'll still be at your original budgeted expectations?

I think we were pretty conservative. One of the things we talked about is we felt pretty conservative as to how we had underwritten that. I think we are going to -- I think we're going to be okay, and we're sticking with what we underwrote it at. Okay.

The original underwriting was back in September/October. And, you know, by December, it actually had improved a bit. And so we have a little bit of room in that one, to absorb the impact pact of the military. And we just wanted to mention that with something we looked at internally in the course of that transaction, and actually mentioned on the conference call that -- where we announced the facts -- acquisition, it was a concern. And we thought we had adequately considered it.

Great. Thank you.

We'll here from Brian Legg with Merrill Lynch.

Are there any additional nonrecurring items in your '03 guidance?

Yeah. There are some nonrecurring items in our '03 guidance. We talked about it before. Do you remember what that is, Mark, by any chance?

We had 5 million of nonrecurring in '02. And on the high end of the range I assume -- I believe we assumed $1 million of nonrecurring income to come through '03.

$1 million in '03.

Right. So the low end is zero and the high end is 1m?

Right.

And can you talk about, in the interest in equity income, there's a sequential drop, it looks like about $1.4 million and 700,000 respectively? What went on there and is there good run rates to those two line items?

Where are you again, Brian?

Yeah, I'm sorry, the interest income and equity income in JVs.

The Monaloa note paid off October 1st. The reason for that drop off, and secondly, equity income?

Yeah, I'm looking at the two items, interest income and the equity income in co-investments dropped by about 700,000 sequentially.

Sequentially, let me think about that --

We can talk about that off the call.

Okay.

Can you guys provide a revenue run rate adjustment for the tax portfolio, just to get a sense of the timing?

We haven't. Maybe we need to consider that. We built -- as we said in the last conference call, we built Sachs into the guidance. We increased our range by 5 cents, but I don't think we broke it out. If you would like us to --

Yeah, I'll get back to you on that.

It looks like the big increase in your administrative costs was from -- in your operating expenses was administrative costs which increased 1.5 million. Is that what you're saying, that's not recurring?

That's correct.

Okay. Is there a better run rate for that particular line item broken on the administrative line item, what went on in the 3rd quarter?

Well, it's probably better to use the year-over-year numbers I would think.

That's fine. And it sounds like from your comments, Mike, that the reduction in concessions significantly don't have a whole lot of significance given that turnover decrease, 22%, is that a fair assessment?

Yeah. I mean, there are a couple of different ways you can look at that. I mean, historically the 4th quarter is weak, and, therefore, you would expect a little bit more concession activity to entice people. But, you know, I think concession activity continues to be flat or maybe a slight downward bias.

Brian, just real quick on your equity income, the reduction, that had to do with on the Newport assets, we encumbered those assets with larger loans and with a fixed rate.

Right.

And the fixed rate versus the variable and that's causing the -- that's the most significant component there of causing that sequential reduction.

And is that a potential dress up for a sale?

It's one of the items that potentially is on the list. I wouldn't go quite as far as you took it.

Okay. And what did you do with all the proceeds with -- you issued a lot of various secured debt in the quarter, what did you do with a lot of proceeds for that debt?

Almost all of that went to the Sachs related transaction. And we placed the -- actually, that piece, the Parker Ranch ones were placed as well. But the secured fixed rate debt, virtually all of it was Sachs related.

Regarding the bond, do you think can you do 250 to 300 million in the bond, even though the yield was light in the quarter?

Yeah, the answer to that is, our goal is to fund -- is to invest the fund proceeds or equity. As we said in the past, we're not going to do anything stupid, and, you know, we'd rather give the money back to our partners than invest it poorly. That is the goal.

We think that there are enough transactions down there. As we talked about in the past, we look at investments going-forward, there's two pieces of it, one is the going-in rate and the other is the rental growth we can expect. As I said, in Portland and the Bay Area where you see flat rents going-forward, unless we can just get some extraordinary cap rates, probably nothing happens here, in Southern California, if we can get 6 1/2 to 6 3/4% cap rates with 3 to 4% rental growth going-forward, that is a formula that works for us in the fund. So those aren't impossible.

There are transactions down there in that range, and we do expect those markets to continue to grow. We have to work very hard and we're going to try our best. It's a goal, and I don't know we're going to be able to achieve it.

What's that leveraged IR you want to get to? That you can make a 6 1/2 work?

It's 18.

Okay. And what were the yields on the acquisitions in the quarter?

In the quarter? In the fund?

In the fund.

The acquisition we've had in the fund to date have been -- they've been all over the board, but they've been in probably 6 3/4 to 7 1/2. The last two that we did were, I think they were in the high 6s.

And some of the older acquisitions are above 10 now? Some of the original fund acquisitions are about 10. They continue to grow.

Okay. Thank you, guys.

Our next question will come from Jay Leup with RBC Capital Markets. Please go ahead with your question.

Hello, Jay and David here at RBC. On asset sales with the cap rates you talked about in Southern California, is there a chance that you would expand your asset sale program in that market despite the fact you want to net-net grow there, and also, on the acquisition front, what are the chances given the valuation in your stock right now that you use your currency once again to make acquisitions in 2003?

Okay. Let me start with the first question. I think, you know, one of the things that's sort of the rage today, when people are talking about repositioning, and I think repositioning is a requirement if you made a bad investment to start with, and we've tried not to make bad investments, we've invested in sub markets we believed in.

The Tarzana market was a secondary market we bought it for 10, sold for 20 and repositioned it. You know it going-forward, because of the dynamics in California, especially with Prop 13, the -- it's very, very difficult, unless you got bad assets that you need to reposition. I think that selling assets is dilutive. It's tough to sell at you know, at a 6 1/2 and buy at a 7 and make it work. It's -- in fact, it doesn't work, we've been through the numbers a bunch of times. So if we have some poor-performing assets, we're going to sell them and redeploy that money no matter what. I don't think we have a significant amount of that kind of property, so it's -- don't expect to see a lot of that from us this year.

Second point, with our currency, you know, with our stock price where it's at. We're sensitive to that, and unless we can get cap rates again that beat the market, if we can find a seller who is willing to split the tax benefits with us, essentially, to make our yield going in yield greater, I don't think you're going to see very much down read up read kind of activity from us. We might pick off one or two, but it will be very nominal.

Okay. And Bob, you had mentioned earlier, I think you were afraid of the Bay Area traffic being up 8% so far this year, and that concessions seemed to be lightening up a little bit. Are you ready to make a call as of yet as to when you think the market locally here turns around? Also, could you give us a little more color on what's happening in terms of new traffic in your Seattle properties?

In the Bay Area -- I'm not ready to make a call on where things are going. I think the Bay Area hinges on the tech economy. The significant area where we are is driven by where the tech world is. They have not fully recovered yesterday yet, and until they do --

And Jay, we ask Bob that question every day. And John Lopez is here too, we ask him as well.

As far as, I think, the traffic again, as far as it being up, though, has more to do with the fact that our assets are in the core location and people now don't have to drive as far to get closer to the job. They continue to want to come into the closer areas. Your second question was on Seattle?

Yes.

Just as far as where the traffic?

Yeah, in terms of -- I think your commentary was on the Bay Area overall, in terms of being up 8%. If it was with the portfolio, I don't need any additional commentary. Can you give us any additional color on what you're seeing in Seattle?

Seattle's traffic is flat right now, and again, I think it's going to be dependent on what happens with job growth expectations there, if we get a little bit more -- if we get any kind of a strengthening -- most of the stuff you read suggests the economy should strengthen sometime later this year. If that happens, we could probably do better, but it's a little early for us to tell.

Okay. And then Mike, last question, just with the change in the budget on the San Marcos/Richmond project. Can you give us an indication where the yield expectations on those projects are right now?

Yeah, I think to reiterate what Keith said, I think it's in the mid 8 range.

Great. Thank you.

Moving on, we'll hear from Andrew Rosivach from Piper Jaffray.

I have a question for John. I'm trying to remember, I don't know if I'm getting too optimistic here, in San Jose, are we getting close to the point where there are a couple big multi family jobs that are delivering, all of a sudden they're going to stop and the supply scene looks a lot better?

Yeah, what we saw last year, we have 4,000 units on the market. And there was quite a bit, you know, large projects delivered. There's a few of those still to be delivered this year, but what we've seen is sort of a -- in the Bay Area, the sharpest decline in multi family firm activity has been in San Jose, so we expect probably deliveries down to the 2,000 range over the next -- in the '04, '05 period.

Let me ask you specifically in '03, when did the big deliveries stop? Is it the second half or is it even sooner than that? You're not competing against other guys that are in lease up?

Well, I'd have to say that there are some projects that were started. We're probably going to have delivery through most of the year, I don't think it's a case of, the first quarter is all over with and then there's no delivery.

Okay.

We pretty much have a spread through the end of the year, can you figure that pretty even distribution.

Got you. Okay. Keith, I had a question on when you were quoting cap rates, were those on assets that were free and clear, or -- could those also be assets that are encumbered. Where I'm going with this, we're thinking about cap rates and free and clear assets rather than ones that have debt and wouldn't get the same cap rate as the typical market quote.

I -- those were free and clear, I mean, assets that don't have -- or that do have financing in place are getting dinged, and the reality is, they're probably just not selling. I mean, this was an asset in Cupertino that was on the market. It couldn't be sold. The debt wasn't that bad. And it was in the high 6s as I recall. But, you know, the seller was looking for that kind of cap rate, they just couldn't pull it off because the debt was dragged on itself. I -- my sense, that I was -- you know, those cap rates are -- sort of the best in the market which are for unincumbered assets.

Got ya. Mike, a quick one, Mike, there's a note that you had last quarter that you stopped accruing interest on. Is that going to pick up again, or is that out of your numbers?

That's completely out of our numbers.

Great, thanks.

Obviously it would help to generate a yield on it, but the owner has to lease the building and, you know, it's pretty weak market right now.

Got you. Thanks, guys.

Thanks.

Our next question will come from ADP Investments, Richard Crawley.

I have a follow-up question on the fund, is there a horizon which by which you have to have this money invested by?

It is, it's December of this year.

Is it separate transaction of it or is it the whole -- whatever's not invested.

It's the whole thing, whatever is uninvested and not subject to call for a future investment. You know, there's a potential that, with their consent that we could extend that. We've not evaluated that yet. But we'll be looking at it as the year unfolds.

And then with respect to the -- any of the fees that you're generating presently, are they -- you know, conditional on, the monies getting invested or no?

They are -- I mean, for the investment period, to the for -- not for this year, to answer your question, so the fees relate to the investment period on committed capital. When the committed capital declines, the fees decline.

Thank you.

Next is David Harris with Lehman Brothers.

Hi, David.

Hello. Do you still have a self-imposed cap of 48 on your share buyback program?

We do, yes.

Is there any restriction on the Sachs family and the ability to issue their shares on the transaction?

There is not.

And the second question regarding Sachs, I think at the time you indicated there was some access of -- I think I made a note of [40] million. Have you made any progress in potentially selling those assets?

Yes, there is. And David your notes are good, as usual. There are is -- there is the RV park and manufactured housing portfolio which is roughly 40 million. Our view is, as a result of the transaction, we're going to hold on to those assets for some period of time. We're not in the process of disposing them. And, you know, there's some -- essentially some tax reasons why that is important to pus.

And what sort of tax arrangement with the Sachs family?

No, there's not. Essentially we step into their low basis in their assets. So we need to manage those low basis, which typically means using 1031. 1031 only works if you have an investment intent which we have. So you basically have to become comfortable with the assets for some period of time for one reason, to satisfy the intent of 1031.

When the -- are you presented with any particular management challenges?

Well, you know, most of the Sachs assets are managed by the groups that have managed them for many, many years, so they have not presented a particular management challenge or difficulty. So the answer to that would be no.

The core assets that you wanted to get your hands on, those have all been simulated within your own management systems now?

No, they haven't. We've taken over management of several assets, but again, we don't -- worst case scenarios, we don't have a hiccup on any of these assets, there was an agreement with existing management groups to continue their management and we will continue to do that.

Are you running the two systems side-by-side --or will you take over at some point in time?

We're going to phase it in, we've taken four assets over in March. I think we're taking another three assets, and right now we've got -- you know, we've got an asset manager who is over -- you know, looking over their shoulders and back in the field as we speak. You know, making sure that their management results are consistent with our needs. So far so good.

Proforma -- it's very early in the day, but have we gone proforma --

I couldn't hear you.

No surprises, one way or another? You've not exceeded expectations?

As they indicated earlier, I think what's happened is, we wrote these assets in September, October and by December we're somewhat head. Bob mentioned some of the deployment so we -- and so that's impacted it negatively a bit. But we're still better off than we were in our individual underwriting. It's our expectation, a month has gone by basically, still a bit too early to tell.

Thanks, guys.

Next question is from Lee Shallop with Bank of America Securities.

Good morning, everyone. Ken Oppenheim is here too. You touched on the expense back in the 4th quarter, but could you go through a little more color on that?

Sure. I'm not sure, you know, what I can do. I guess the answer is, it represents what, about $600,000 in expenses. 9% versus the 3% expectation or annual, you know, result, and I think it's -- we expected to -- we basically underestimated the number of unpaid invoices in the system in the last couple quarters. In the last couple months of the year there's a push to get everything in, start the next year fresh, and that number turned out to be -- the amount of those invoices turned out to be greater than in the past, than we've had historically.

I'd like to give you a lot more color, but I'm not sure that -- I'm not sure I could really tell you much that would really help with that.

In terms of going-forward, is that something that, based on the experience this year, is less likely to happen in future years?

Of course. What we will do is we'll become, we'll be more aggressive at the end of every quarter in adjusting our accruals, each quarter that goes by, we are going to, you know, have a larger accrued liability. You know, which essentially is based on experience, and so this experience was one where we realized we had more unpaid invoices floating around in the system. So again, what we'll do at the end of every quarter is be a bit more aggressive in accruing expenses.

This is Dan Oppenheim with a question, I was wondering about the cap rates that you mentioned, it seems lower than what you talked about in past quarters, if prices are unchanged or are prices decreasing because there are buyers out there for the properties?

Prices are not increasing, cap rates are reducing to keep property values close to where they once were. I think actually property values have decreased. We have seen a couple of newer projects that were for sale out here. Neither one has sold, but they were in the low -- in the low 200s about 200 to 210 range where a year ago those properties have probably sold for 240, 250.

I think you're seeing prices actually being reduced, but rents have decreased faster, so cap rates continue to decrease to try to -- so sellers can maintain some semblance of where they think their values are, but as you said, there's very few transactions happening, so it's hard to validate those cap rates.

Thanks.

Next we'll hear from Rich Moore with McDonald Investments.

It's Dave Rogers here with Rich. Had two questions for you. The first one on the Sachs portfolio, another, you had a chance to digest that a little bit, any thoughts on redevelopment activity and those assets? The second question, give us your thoughts on the dividend outlook and policy for 2003, please.

Let me start with -- redevelopment, we -- there are several projects there that we know we're going to take a hard look at, but frankly, we have not been down there digging around too much, just because we just took over the portfolio, our onside people are going through due diligence. They are in a tizzy so we're trying to keep the good people in place. We think that there are several projects that will benefit from our redevelopment program, and can get the kinds of yields that we're expecting to see in the 50% range.

As to the dividend, historically around this time of year, or our next board meeting we will make a presentation to the board about the dividend. The expectation there is essentially the same dividend or perhaps a small increase in the dividend, less than 5%.

Thank you.

Next we'll hear from Kevin Lampa from Edward Jones.

I wanted to follow-up a little bit about the cap rates, you're talking about cap rates like in Southern California and the 6 1/2 to 6 3/4 range. And you're also looking for DIRs of 18%. It seems difficult to pencil going from a 6 1/2 cap to an 18% leverage DIR, unless you're using quite a bit of leverage or assuming some growth. Can you comment on what you're using as far as growth expectation?

As I said, we've run the model a number of times and we're very, you know, we understand it very well. But going in at the 6 3/4 to 7 cap rate starting out. And we've got a growth rate in the 4 to 5% range. That will produce the 18% leverage DIR that we need.

And you -- I mean, our markets such that you expect that growth of 4 to 5% to be doable for the market or is that more of an asset by asset?

I think it's asset by asset. I think as I talked about in Southern California, we look at two to four percent rental growth this coming year, in Bob's comments. We see the Ventura market as a market that has, you know, the four% rental growth going-forward. North Orange County, 4% rental growth going-forward. There are some types of markets out there -- and it has to be asset specific. It's a combination of the two.

And then can you also just comment on who you're coming up against as far as who's buying the market, is it -- you know, what type of investors you're running up against?

Sure. Well, there haven't been -- you know, the REITs haven't been real active. Most of the buyers, there is a -- two transactions in San Diego, I can think of recently that closed, were private investors with GMAC backing. It's the Fairfields of the world, the CT's of the world, the local players with institutional money behind them primarily, the REITs have not been real active.

Thank you.

Sure.

At this time we have one question remaining in the queue. I'd like to remind everyone if you would like to ask a question or you have a follow-up question, please press star one to signal. We'll take our next question from Jay Habermann from CS First Boston.

Just to clarify, I guess on acquisitions, can you run through your target. You mentioned I guess in the beginning of the call for 2003?

The target for acquisitions?

Yes.

As I said -- actually toward the end of the call, the goal for acquisitions this year is 250 to 300 million dollars of acquisitions and $100 to $150 million of new development. The goal on the acquisitions is defined going into yields -- not going on yields, cap rates on economic grants at about 6 3/4 with rental growth of 3 to 4%. And on the development deals we're looking for 150 basis points better than that. So that's going to equate to something like, you know, 8 1/4 yields.

Right. But is that exclusively for the fund?

Yes.

Okay. Thank you.

It appears there are no further questions at this time. Mr. Guericke, I'll turn the conference back over to you for any additional or closing remarks.

Thank you. As always, we appreciate your participation in these calls, and if anything needs to be further clarified, we are here, and just please call us. I hope to hear from all of you next quarter. Thank you.

That does conclude today's conference call. We thank you very much for your participation and have a very good day.